It was interesting recently when the cost of PFI to Hospital Trusts entered the news. To recap, certain Tory politicians were complaining that their local hospital trusts are hobbled by the costs of PFI schemes entered into under the last Government. The cynical would say that this is no more than a smokescreen to distract from the current lot of cuts, but the future costs of current decisions is a big issue in public finance.
Now there is nothing wrong with ‘buy now, pay later’ as such – as long as you go into it with your eyes open and understand what you are getting yourself into. And politicians in particular will always be open to a nice buy-now pay later scheme if there’s one going.
The PFI scheme in theory is sustainable because the benefits of the new build hospital or school, prison or road will be consumed while the contract payments are being made. There is an obvious irony about a politician standing outside a spanking new hospital complaining about payments to the PFI provider eating into the budget for patient care, as if somehow hospital services could be provided without the inconvenience and expense of having to provide hospitals.
Unfunded public sector pension schemes are a more problematic buy-now pay later schemes because the future taxpayers who will end up paying for them will not get the benefit of any of the value provided by the public sector workers receiving the pensions. In effect past generations have employed teachers, police, soldiers and NHS staff (and to a lesser extent local government staff since their scheme is partially funded) on the cheap. The problem is not that these commitments were entered into, but that the government of the day failed to make sufficient financial provision for them.
The question of value for money in PFI, of course, is another matter. The best that can be said is that it can be quite hard at the start of a twenty five or thirty year contract to know what is going to happen that might make the deal look like a bad one several years down the line. The classic RPI based inflation indexation for PFI contract payments for example is looking like a bad deal now; three or four years ago it was looking fine. Perhaps more risk should have been transferred to the private sector, but as we know, risk transfer always comes at a cost.
More frustratingly for both parties to PFI contracts, the impact of changes in Government policy can be both disruptive and expensive to resolve. All those Secondary School PFI schemes that predated first Building Schools for the Future and now the academy model would have worked best if the contracts could have been allowed to run more or less unamended for the duration. Unfortunately asking the Government to go twenty-five or thirty years without thinking up at least a dozen new ways of providing school buildings is a bit like expecting the cat to stop chasing mice. Each one of those policy decisions would have the potential to frustrate the contract and that’s another risk that the private sector has to build in.
Politicians reserve the right to complain about the foolish decisions of their predecessors, and that is in fact how our system is supposed to work. The feature of a democratic system is regular elections and changes of government which leads to changes in policy; it makes our system responsive to change and, from that point of view, relatively efficient. The fact is that it also comes with certain inefficiencies of the type already described.
The question is not why do public sector buy-now pay later schemes end up costing more than anticipated – the answer to that is simple enough- but whether given that truth we should really be encouraging them at all. For finance professionals in the public sector, all we have to do is to stop the cat chasing the mouse- easy!
